Fed takes control of troubled AIG, will lend it $85 billion

WASHINGTON — The Federal Reserve Board agreed Tuesday to provide an $85 billion line of credit to troubled American International Group, a huge player in insuring the debt obligations of other companies, in a plan that would allow the company to sell its assets in "an orderly manner."

In return, the U.S. government took possession of 79.9 percent of the company and will have the right to veto the payment of dividends to common and preferred shareholders.

"A disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a news release announcing the board's action.

Whether AIG would survive the rescue, and in what form, was unclear. In its statement, the Fed said that it expected AIG to sell off many, if not most, of its businesses and use the proceeds to repay the loan. The term of the loan is 24 months, meaning the Fed expects AIG to have repaid the money, with interest, by then.

U.S. Sen. Christopher Dodd, D-Conn., chairman of the Senate banking committee, called the action "a clear sign that the financial crisis — which is a direct consequence of this administration's neglect and wayward economic policies — continues to deepen."

"Actions that were inconceivable just days ago are now occurring in a manner and at a pace that is certainly cause for concern," he said.

The fate of AIG had become the focus of Wall Street in recent days as its stock plummeted and it seemed increasingly likely that it would not be able to raise the capital required to fulfill its obligations to creditors.

The Fed's statement said it had acted to make sure that didn't happen. The purpose of the loan, the Fed said, "is to assist AIG in meeting its obligations as they come due."

It was not immediately clear whether AIG's corporate leadership would remain in place or what would happen to its outstanding stock.

"The interests of taxpayers are protected by key terms of the loan," the Fed statement said. "The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries."